A provident fund or provident funding is a compulsory saving scheme that is managed by the government of developing countries. In some ways, these funds resemble a hybrid of the various plans and social security that is used in the United States Provident Funds also share some traits with employer-provided pension funds.
What are Provident Funds?
Provident Funds or Provident Funding is another name for pension funds. It is provided to the employees with the total payments at the time of their retirement from employment, which is also known as the lump sum payment.
Lump sum payment is an important element in two different kinds of funds, provident funds and gratuity funds. The similarity between these both funds is that these both types involve lump sum payments at the end of employment
The employers give their desired portion of their salaries to the provident fund companies. The owners must contribute on behalf of their employees. The money in the fund is later on managed by the government of the country.
When the time is up the money is withdrawn by retirees or their surviving families. At some conditions, the provident fund/provident funding also pays out to the disabled who cannot work.
What is the purpose of Provident Funds/Provident Funding?
Provident Funds are run by a leading independent mortgage lender and servicer of any country to create a customer-oriented culture with an experienced team of highly trained mortgage experts. The citizens are provided with mortgage solutions for all of the refinance and home purchase needs, providing the service of residential mortgage loans nationwide and employ mortgages to the professionals.
Provident Funding/ Provident Funds are also known as the best loan service in the country. The companies that provide provident funds produce the highest quality loan products at the lowest cost through wholesale, retail, and correspondent lending channels.
Types of Provident Funds/ Provident Funding
When you know about the basic provident funds/provident funding, there are different types of Provident Funds that can be used by an individual for investment and saving purposes.
The Balance of Provident Fund account consists of amount invested by employee, amount invested by your employer and interest received on the amount invested. So the rules and policies related to subscription, withdrawal, and taxability of Provident Funds/ Provident Funding varies from the different type of Provident Fund.
- Statutory Provident Fund
This type of provident funds/provident funding is maintained by Government, Semi Govt bodies, Railways, Universities, Local Authorities of the country. A payment from such funds does not need any kind of recognitions from the Commissioner Inland Revenue and they are also exempted from Income Tax
The contributions made by the employer are free from income taxes in the year in which contributions are made. But the contributions made by the employee can be declared as tax deduction. Interest amount credited during the financial year is not treated as income and hence it is excluded from income tax.
- Recognized Provident Fund
Any business or organization which employs 20 or more employees can join RPF. Most of the salaried individuals generally contribute to this type of Provident Fund. Among employers, this type of provident fund is one of the most popular types of Employees Provident Funds.
Recognized Provident Fund is maintained by the private sector or organizations of the country. Payments from this type of Provident fund are exempted from Income Tax.
In this type of Provident Fund, the business entity can either joins the Govt. scheme set up by the PF Commissioner or the employer himself can manage the scheme by creating a Provident Fund Trust. All Recognized Provident Fund Schemes must be approved by The Commissioner of Income Tax of the country.
- Unrecognized Provident Fund
This type of Provident Fund is not recognized by Commissioner of Income Tax of the country. It is maintained by employer and employees in an establishment, but they are not approved by The Commissioner of Income Tax. Since these type of provident funds are not recognized, they have a different tax treatment as compared to Recognized Provident Fund Schemes.
The contribution of employer is not treated as income in the year of investment and hence not taxable in that specific year. So, it is tax free during year of contribution. Interest earned is not claimed as income in the year instead it is credited and hence not taxable in the year of accrual.
At the time of retirement, the contributions of employer and interest thereon are treated as ‘salary income’ and it is chargeable to tax. However, the the employee’s contribution is not chargeable to tax. Interest on Employees contribution will be charged under income from other sources.
- Public Provident Fund
The Public Provident Fund is a savings-cum-tax-saving instrument and retirement planning tool. The primary goal of this type of provident fund scheme is to mobilize small savings by offering an investment with reasonable returns combined with income tax benefits to the employers.
How Provident Funds Work – Is it beneficial?
Provident funds work when money is saved or held in private savings accounts and carry on to grow in many developing countries. Sometimes, most families aren’t provided with a comfortable life in retirement.
Retirement is a challenge itself which is deeply depended on social changes. The world is developing and so does the societies. But different societies are trying to cop up with the rapid growth of industrialization. In traditional societies of the world declining birth rates is widely dispersed by family members, and longer life expectancies have made it more difficult to sustain this age-old safety net.
Keeping in mind these issues in every society of the world, the government of developing countries of the world has introduced financial support to retirees and other financially or physically vulnerable populations through providing provident funds. A provident fund savings supports a person in a way that readily scales payouts to their available balance.
How Provident Funds impact you?
The government of any country is considering lowering the rate of contribution towards EPF. Provident Funds can have an impact on your take-home pay and on the corpus collected at the time of retirement.
There are many important facts related to the Provident funds account, which represents a big chunk of long-term savings, which you may not be aware of. Here are some of them discussed.
1. Calculating contribution:
Your contribution is at least 12 percent of your salary, including basic, fundamental allowance including cash estimation of any food concession and a maintenance stipend. The rent allowance of the house, over time, bonus and commission are excluded.
Employers are supposed to contribute a matching commitment. But they are not legally restricted to do that. In most cases, where employers make a matching contribution, the amount is included in the gross salary.
2. Fund management:
The cash goes into a fund managed by the Employees’ Provident Fund Organization which goes under the Labor Ministry. The public authority permits businesses to deal with their own fortunate fund schemes if they hold fast to specific conditions.
The private trusts need to look for independent endorsement from the Income Tax Department for tax cuts on employees’ contribution to the fund.
Where your cash is contributed: Only in fixed-pay protections. Interest in values isn’t permitted. The protections where your cash can be contributed are focal and state government securities, securities gave by open area organizations, fixed stores of public area banks and common asset conspires that put resources into government protections.
3. Rate of interest:
It is reported each year as indicated by the central government’s recommendations in meeting with the leading body of trustees of the Provident Fund.
4. Tax Benefits:
The employer’s contribution’s up to Rs 1 lac which is deducted from the available pay. The employer’s contribution is likewise absolved from the charge. The premium procured is additionally tax-free.
The guidelines are somewhat unique in the case of private trusts. The employer’s contribution is charge excluded simply up to 12 percent of fundamental compensation. Additionally, just the premium procured up to the rate offered by the Provident Funds to its endorsers is tax-exempt. Anything well beyond that is burdened.